QUICK: Our next guest says that there is plenty of evidence calling for a
change in corporate governance rules. Joining us right now from Palo Alto is
Professor Joe Grundfest.

He is Stanford University Professor of Law. He's also a former SEC
Commissioner.

And Joe, when we start talking about election day, we've been looking
to what happens across the nation. But you've been looking at what happens on
election day when it comes to shareholder rights.

And you've got some very interesting information you've come up with.
Why don't you lay some of that out for us?

GRUNDFEST: Good morning, Becky. Thank you very much. Yes, this really is
an election day story. We've been working with the Investor Research
Responsibility Council looking at voting mechanisms in corporate America.

And one of the interesting things that we found is that there can
really can be a disconnect between who gets to vote in a corporate election and
the best interest to the people who are voting.

If we'd step back for a minute and just have a look at what happens,
the kinds of elections we're having tomorrow, if you're going to be voting here
in California, you're typically a citizen of California and you're going to live
with the consequences of your decision.

But in corporate America, it turns out that it's relatively easy to
have shareholders vote in elections even though their economic incentives might
not be aligned with those of the corporation in which they're voting.

QUICK: You know, you lay out a very interesting example in the notes. And
maybe that will help people understand it, too. This has a lot to do with those
who are trading short at this point and some of the interesting ways.

Why don't you give us an example of how somebody would be able to issue
a lot of votes or cast a lot of votes in a shareholder election but maybe not
have a big ownership position?

GRUNDFEST: Absolutely, Becky. Let me give you one of the simplest possible
examples. Let's assume that I happen to own a million shares of just about any
publicly traded corporation.

But at the same time that I hold those million shares and am legally
able to vote a million shares on a corporate election, I've also gone short five
million shares.

So what that means is that from the perspective of my portfolio, I'll
actually make more money if the value of that company's stock declines.

Despite that fact, as long as I'm a shareholder of record for those
million shares, I get to cast those millions of shares just like the other
shareholders who are actually going to make money if the stock price increases.

QUICK: But that gets you into a really interesting perspective. We're not
suggesting that those who go short would have their rights taken away for the
long shares that they hold.

GRUNDFEST: Absolutely not. In fact, given the amount of information that we
have, I think the fairest thing to say is we don't know whether this is a big
problem, a small problem or is a practical matter, a non-problem.

The amount of information that we lack about this phenomenon and its
implications far outweighs the amount of information that we have. And if
there's going to be a call to action in this area, I think it's a relatively
simple one.

It makes sense to find out because engaging in these sorts of
decoupling transactions, whether it's in the equities market or in the debt
market, is relatively easy. It's relatively cheap. And it's becoming cheaper
and easier all the time.

QUICK: What made you start looking into this idea? Because it's not
something that had occurred to me before.

Were there complaints that had come up from some companies who felt
like perhaps their elections were being taken over by people who had alternative
interests?

GRUNDFEST: Well, this is an idea that's been bouncing around in the academia
for many years now. And we decided to do this to collect all the literature
that we could, tried to do a relatively comprehensive literature survey and lay
the questions out altogether in one place.

I think when we take all of the different articles that have been
written, look at all the different concerns that have been expressed and compile
them in one document, you'd begin to see a larger and bigger pattern.

And it makes the question of finding out what's going on in corporate
America on the voting front all the more important especially as Congress and
the SEC keeps placing more emphasis on the voting process.

QUICK: This paper's been sent to the SEC, correct?

GRUNDFEST: Absolutely. It's been filed as a comment with the Commission.

QUICK: And what is the takeaway? That we need to do more work?

GRUNDFEST: Absolutely. The takeaway is we may have a problem. The takeaway
is not that there is any particular need for regulation. The takeaway is
definitely not that we need any intervention at this point.

The takeaway instead is we may have a problem. It may go to the very
core functions of corporate democracy. We know that Congress and the SEC are
looking more and more to have shareholders decide these matters in elections.

And if we can't really trust the electoral process, what kind of
confidence should we put in that mechanism?

...

GRUNDFEST: Well, great question, Doug. I think, as a practical matter, what
you'd be most concerned about is evidence that shareholders who have these
deep-coupled voting and economic interests actually have turned out to be
pivotal in elections.

That would be the worst case, a situation where a shareholder who
actually had an interest in a company's stock price going down or a debt holder
who was hedged out through credit default swaps or other mechanisms, having an
interest in a particular tranche of debt failing or losing value, actually
participating in the legal process, in the electoral process in a way that tilts
the outcome.

That would be the sort of red flag. And then you'd want to look for
the number of times which that may actually have happened. Again, I think the
important thing right now is let's roll up our sleeves.

Let's find out whether this is really a problem before we actually
start taking any regulatory actions.

QUICK: All right, Professor Grundfest, we want to thank you very much for
your time this morning.